Euro falls after weak economic data

June 23, 2008

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By , LONDON, June 23 – The euro fell against the dollar on Monday after weak economic data for the eurozone and ahead of a US central bank meeting at which interest rates are expected to remain on hold.

The European single currency fell to 1.5492 dollars in late London trade from 1.5611 dollars in New York late on Thursday.

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Against the Japanese currency, the dollar increased to 107.88 yen from 107.25.

Traders reacted to Germany\’s key business climate index, which dropped to an 18-month low point in June due to high oil prices.

The index calculated by Munich-based economic research institute Ifo dropped sharply to 101.3 points from 103.5 points in May.

Separately, the eurozone\’s purchasing managers\’ index (PMI), compiled by data and research group Markit, slid to 49.5 points in June, from 51.1 in May, according to an initial estimate.

The fall brought the index below the 50-point level indicating a contraction in activity for the first time since July 2003.

"The data suggests that stagnation in the eurozone economy is a given and that recession is an increasing possibility," said Ken Wattret, an analyst at BNP Paribas.

Analysts said the European Central Bank would proceed with an expected rate hike of 25 basis points on July 3 but has little scope for further monetary policy tightening to rein in high inflation.

Jennifer McKeown, economist at the Capital Economics consultancy, said that "inflationary pressures and a solid outlook for the German economy will keep the ECB in hawkish mode for some months yet."

"But continued evidence of a slowdown in eurozone activity should prompt significant rate cuts next year," she said.

Market players were looking ahead to the Federal Open Market Committee\’s (FOMC) two-day meeting slated to begin Tuesday at which US interest rates are expected to be left unchanged at two percent, dealers said.

"If the Fed continues to focus on inflation while recognising bad economic conditions, this would signal the possibility that (US) rate cuts have ended. Then the dollar would not be so easily sold," said Kazuhiko Shibata, Tokyo manager of Dresdner Bank.

Traders will be focusing on the Fed\’s post-meeting statement for any clues on prospects for higher US interest rates that could boost the greenback.

The Fed has slashed its key rate by 3.25 percentage points since the sub-prime crisis erupted in mid-2007.

Although market players have scaled back their expectations of a series of US rate hikes this year, they still see a chance of one or two quarter-point rate rises by the end of 2008 to keep a lid on inflation, dealers said.

In Britain, the pound was weaker after more bad news about the property market.

Housing website Rightmove said prices fell 1.2 percent in June from May.

In London trade late on Monday, the euro changed hands at 1.5492 dollars against 1.5611 late on Friday, at 167.13 yen (167.45), 0.7901 pounds (0.7896) and 1.6223 Swiss francs (1.6158).